Highly Educated Have Biggest Debt Problems

The federal government is suing Bank of America for a $1 billion over the bank's pre-crisis mortgage practice known as "the hustle." But it wasn't just naive home buyers who fed the financial crisis. Renters and the well educated had too much debt too, and a new study concludes that college graduates are most prone to debt mismanagement.

It’s widely accepted that unscrupulous bankers tricked unknowing consumers into loans they could not afford, leading to the financial crisis. No doubt, plenty of that occurred—underscored Wednesday with a $1 billion federal suit against Bank of America’s mortgage arm Countrywide Financial.

But it turns out the “victoms” were not, by and large, unsophisticated rubes. A new study finds that highly educated Americans were most likely to take on unmanageable debt in the pre-crisis years. What’s more, gross personal financial mismanagement occurred across the population and not just in the mortgage market and not just among the unsophisticated.

The study draws a line at the point where monthly payment on household debt equals 40% of income. That’s where default or bankruptcy becomes most likely should the household experience a decline in income, say researchers led by Sherman Hanna, professor of consumer sciences at Ohio State University.

Overall, the percentage of Americans exceeding this 40% threshold jumped to 27% in 2008, from 17% in 1992. College graduates were more likely to be in this group than those without a degree, according to the study. Those describing themselves as optimistic about the future also were among the most likely to have unmanageable debts, the study found. Says Hanna:

“People who piled on debt may have been too optimistic about their economic future, but you can’t blame that on a lack of education. People with college educations may have thought they were immune to any economic problems.”

Meanwhile, folly in the mortgage markets was only part of the problem. One in three renters had unmanageable debts, versus just one in five homeowners, the study found. The percentage of homeowners who had heavy debt burdens increased to 22% in 2007 from 15% in 1992. But the increase was even more dramatic for renters, going to 35% from 20%. Says Hanna:

“The percentage of renters who piled on debt really surprised me. It shows that the financial crisis wasn’t all about housing speculation. There was too much debt in all parts of the economy.”

None of this minimizes the foul play of bankers as detailed so masterfully in Michael Lewis’ The Big Short. Indeed, the suit against Bank of America charges that the bank’s home loan program, known as “the hustle,” was designed to churn out mortgages without proper checks. The bank would collect fees and sell the mortgages into the secondary market.

The government alleges the program was “intentionally designed to process loans at high speed and without quality checkpoints, and generated thousands of fraudulent and otherwise defective residential mortgage loans.”

Clearly, lots of homeowners were duped. But many signed the loan papers without reading them and bear some culpability, as surely as renters who ran up their credit cards. It’s time to stop pretending that people with resources or a good education necessarily know what they are doing with their money. Financial ignorance afflicts all classes and leaves us vulnerable to another financial crisis at any time.

Dan Kadlec is a journalist who has written about personal finance for TIME and other outlets for 25 years. He is the author of three books, a leading voice in the global financial literacy movement, and strategic adviser to the National Financial Educators Council.

Kadlec's latest is A New Purpose: Redefining Money, Family, Work,Retirement, and Success